Consumers got a break in the Senate today, as an amendment to the Wall Street reform bill from Jeff Merkley and Amy Klobuchar passed by a 63-36 count would impose tough new standards on the mortgage lending industry.

The amendment, borrowed from the lending rules governing many states, has two major parts. One, it establishes underwriting standards that forces lenders to take into account ability to pay from income and other assets when making loans to borrowers. Second, and more important, it makes illegal the practice of “steering payments,” where lenders actually get a bonus for pushing their customers into high-risk loans with high reset rates. It prohibits the loan originator from receiving kickbacks from other parties on loans as well. This is from the press release:

“This predatory subprime mortgage practice directly led to the collapse of our largest financial firms and resulted in millions of lost jobs and foreclosed homes,” said Merkley. “I urge my colleagues on both sides of the aisle to join this effort to put an end to deceptive mortgage practices that hurt our economy and threaten the livelihood of families in communities across the country.”

Under the current rules, mortgage lenders and loan originators are allowed to steer families into high-cost and riskier loans, even when they qualify for affordable loans. A Wall Street Journal study found that 61 percent of the subprime loans that originated in 2006 went to families who qualified for prime loans. This practice was a key driver of the housing bubble and, ultimately, the foreclosure crisis that has devastated communities across the nation.

If the Wall Street reform bill passes, the environment for buying a home will be mildly safer and less deceptive. Merkley already had added a provision in the bill to ban pre-payment penalties. And banning steering payments would help put families into more solid loans at the outset. The problem we have right now, of course, is with families already in their home loans and struggling to pay them. The foreclosure prevention program put forward by the Obama Administration has been a complete failure. So we still need to deal with the current housing crisis. But this amendment at least would try to arrest the lax lending standards that helped cause the problem.

A more stringent amendment from Bob Corker, which would force a certain amount of capital payments on any home buyer, is up for vote right now.

UPDATE: Two things. The Corker amendment failed, 42-57.

Also, an amendment adopted last night by voice vote actually un-appropriated $150 billion from the TARP, making it a $550 billion dollar program. The Treasury never spent the full amount of TARP, and while this new amendment allows a small cushion for the Treasury in case more trouble comes to the financial system, but pulls back the rest of the money.

UPDATE II: Grassley, Collins, Scott Brown, Snowe and Lugar voted for the Merkley/Klobuchar amendment. It’s interesting to see Grassley move to the left during this debate. Right now an amendment from Isakson and Landrieu are on the floor that would increase risk for lenders, presumably to make them careful in their underwriting. It would force 20% equity in a down payment, either in cash or insurance on the loan. Senators appear somewhat serious about tightening lending standards.

UPDATE III: All of these lending pieces and more are mirrored in the House version of the bill. Here’s an abstract of that.

One Response
to “Merkley/Klobuchar Amendment On Lending Standards Passes”

I’ve originated thousands of mortgages over my 32 years in the business. My rates and service have consistently been top-notch. I’ve had no regulatory problems and no civil actions of any kind. My customers return to me for their purchases and refi’s, and now they’re referring their children to me. I’m proud of my record and I’m proud of the benefits I’ve brought to my clients.
On any day my rates are from ¼ to ½ percent lower than what the big banks are offering (at the same fees). And most of the time my service will be better—because I’m a long-time professional and I know what I’m doing. And now the Big Bank/Washington cartel, along with sadly uninformed consumer groups, are shoving me out of business. You think you’re angry—I’m extremely angry.
I’m 62 years old and I’m very good at what I do. I will not work at one of the banks who are closing me down; because, 1) they’re the crooks who actually caused this meltdown in the first place, and 2), they are demanding more and more production from their loan officers and at the same time are paying them less and less.
Sure, there were unscrupulous loan officers making expensive and inappropriate loans to some unsuspecting borrowers in the last 5 years or so. The Big Banks and Wall Street were making billions of dollars on them (read ‘The Big Short’), and they were pushing for loan officers everywhere—including their own loan officers—to make more and more of these loans. People got into the business who were never loan officers before, and never should have become loan officers, in order to make the big profits promised to them by the lenders. Personally, I made a few sub-prime loans, but only after making sure that my customers understood that the ‘teaser’ rate would be gone in a few years, and that the fully adjusted rate would be very high. I told my clients, “You’ll need to improve your credit because when the rate goes up it’s going to be ugly.” And I only made subprime loans when they ‘walked in the door’; I never actively solicited for them. The worst loans out there in the last few years before the meltdown were the 1% and 2% ‘Option ARMS’. These low rates were only good for the first month of the loan. In the second month the rate went right up to its real rate, which was generally 1.5% higher than the regular 30 year fixed rate loans. Yes, the payment was fixed for the first 12 months of the loan, but the negative amortization (unpaid interest added to the loan balance) was, of course, tremendous. A very bad loan, but the Big Banks and Wall Street loved them, and paid well for them, so that they could have a bigger supply for the pools of these loans they were selling to unsuspecting investors world wide.
Do any of you know about the revised Good Faith Estimate of closing costs? This form shows clearly what the lender/broker are charging for the loan. THIS AMOUNT CANNOT CHANGE, not even by $1, so we are committed to this fee. It’s more than an ‘estimate’, it’s a UNILATERAL CONTRACT. So the loan originators who ‘bait and switch’, or try to hide fees, are exposed.
The new Good Faith Estimate also shows clearly the ‘rebate’ (yield spread premium)—and it’s NOW A CREDIT TO THE BORROWER’S CLOSING COSTS. The YSP is no longer paid to the broker, it goes directly to the borrower. And this amount cannot change at all (after the loan’s locked-in), just like the lender/broker fees cannot change. This new Good Faith Estimate makes the loan costs very clear to the borrower, and we are legally committing ourselves to them. Please, before enacting even more one-sided legislation designed to destroy all of the small mortgage businesses in America, please give this revised GFE a chance!
The Big Banks and Wall Street have hundreds of lobbyists in Washington. The banks have for a long time wanted us brokers out of the business, so that they could have the mortgage business all for themselves. These lobbyists have Congress completely swayed to their side, either through the force of their huge numbers, or by their ‘campaign donations’, or both. We brokers, on the other hand, have maybe one lobbyist. We’re too broke to hire any more than that.
It really angers me that the Big Banks who designed these dangerous loans, and approved them and funded them, so that they could sell them on Wall Street, should get away with the propaganda they’re spouting. Please remember—BROKERS DID NOT DESIGN THESE LOAN NOR APPROVE THESE LOANS! Any bank, investor or Wall Street firm could have determined through their underwriting process that certain borrowers qualified for a better loan, or that some were being charged ‘too much’ on a loan. Those lenders are guilty of designing bad loans and then of approving those loans! Too make this whole debacle our fault is wrong (and absurd).
And consumer groups seem to swallow this hogwash completely. It’s really sad, because the consumer will be hurt tremendously by the elimination of mortgage brokers. By eliminating us, their competition, the banks can and will charge more and more on each loan—and you will never know how much you’re being ripped off, because we won’t be around to give you a competitive comparison.
Let me expand a bit on a point I made earlier—that I make loans that are cheaper than the banks all the time. Most of the wholesale lenders out there don’t sell their loans directly to Fannie or Freddie. They can’t get access to the GSE’s directly, they have to go through a middle man—Wells Fargo, B of A, Chase and Citi. That’s right, the same institutions who were bailed out by Congress—and by us taxpayers, and who are making billions of dollars even now because of the way they’re using those bailouts.
So, for example, let’s say I earn my usual 1.25 points on a loan that I sell to one of my wholesale lenders. That rate is, say .25% lower than B of A’s, at the same fees. But guess who my wholesale lender sells that loan to—B of A! So, B of A is making a good profit on that wholesale loan yet their retail loans are not nearly as good as mine. Do you realize how much B of A must be making on their retail loans? And once we brokers are gone, what do you think will happen to your interest rates/fees? Do you think their rates will go down? Really?
Especially because of the new GFE, which protects the consumer to a degree not matched by any other business that I know of, you should be against the Merkely/Klobuchar amendment. It is blatant power play by the Big Bank/Washington cartel. It’s terribly anti-free market, and it will only hurt you, the consumer. And the Big Banks will have won again. It’s not right.